Making Estate Distributions

Show Table of Contents Allocating estate proceeds to heirs

An estate distribution is the delivery of cash or an asset to a given heir. After resolving debts and paying any taxes due, the executor should distribute the remaining estate to the heirs in accordance with the instructions in the will (or as dictated by the court).

General Plan

Before making any distributions, it's best to come up with an overall estate settlement plan: how you plan to resolve debts, which assets you plan to sell, which assets you plan to distribute directly, which heirs will get what, etc.

Your goal is to resolve all debts and to allocate 100% of the remaining value of the estate, with each heir scheduled to receive the proper items and the correct overall share of the estate. It's usually easiest to try to do things in this order:

  1. Record Automatic Transfers — Define distributions for assets over which you have no control (i.e., 401Ks, life insurance policies, etc.)
  2. Account for Family Entitlements — Define distributions for any Family Entitlements that will be utilized
  3. Allocate Bequests — Define distributions for any specific bequests made in the will
  4. Prepare for Debt Resolution — Ensure you will have enough cash to resolve the debts, planning to sell assets if necessary
  5. Mark Assets for Sale or Distribution — Plan remainder of asset disposition
  6. Allocate Distributions — Define distributions so that each heir will get the proper share of the final estate

If the estate will not have enough free cash to resolve all debts, even after liquidating all available assets in step 5, you may need to revisit some of the earlier steps in an attempt to satisfy estate creditors, since debts generally have precedence over other estate claims.

Priority chart of estate allocation

The steps outlined above work well for an estate that can ultimately pay its bills, but if not, you will need to keep in mind that an estate must give preference to its obligations in a defined priority order (see diagram). Certain transfers (such as to IRA beneficiaries) happen automatically outside the control of the estate, and the estate itself must then ensure it has enough funds to pay all taxes, then estate administration costs, then any family entitlements, then any general debts, and with anything left over, fulfill any bequests, and finally distribute the residuary estate. If the estate runs out of money handling one priority, then subsequent priorities are left with nothing.

Priority chart of estate allocation

Note that state law determines which debts have priority over other debts, and some debts (such as funeral expenses) often have priority over family entitlements, but these specifics really only matter if the estate cannot pay all its bills (see Insolvent Estates for more details).

EstateExec makes the overall planning process easier by allowing you to mark whether you plan to sell or distribute each asset (see Reference: Asset Planning), and to define proposed distributions to each heir before actually making them (see Reference: Manage Distributions). You can then see at a glance which assets and heirs need more attention, and the Overview tab will show you overall estate progress.

Automatic Transfers

Certain items change ownership or pay out "automatically" upon death: life insurance policies, property held in joint tenancy or community property with the right of survivorship, funds in an IRA or 401K for which a beneficiary was named, stocks held in a transfer-on-death account, and so forth. An executor does not take possession of such items, or control them, but frequently ends up facilitating their transfer (contacting the organizations, providing copies of the death certificate, etc.). While such items are not subject to probate, they can impact the estate settlement process (in terms of taxes owed, calculating certain family entitlements, etc.).

Tip: EstateExec understands that such assets are not usually subject to probate, and will automatically handle them accordingly (you can manually override this if desired; see EstateExec Reference: Identify Assets Subject to Probate). In any case, you should create Distributions for each such item with the "Reason" identified as "Beneficiary".

Family Entitlements

Colorado allows a surviving spouse and any children to claim certain entitlements that supersede most other estate claims, in the following cumulative order:

Personal Property Exemption

A surviving spouse is entitled to $40,000 in cash or other personal property from the estate (for years prior to 2023, see Adjusted CO Estate Limits). If there is no such spouse, then any dependent children are jointly entitled to the same exempt property. This property is addition to anything to which the family would otherwise have been entitled (by will or by intestate succession, as applicable).

Exempt property must normally be claimed within 6 months after the first publication of notice to creditors, or within 1 year after the date of death, whichever comes first. The court can extend this deadline if a request is made before the deadline expires, but any extension can last at most until the 2-year anniversary of the death.

See CRS § 15-11-403 and 404.

Family Living Allowance

A surviving spouse and any children (supported by, or obligated to support by, the decedent) are also entitled to a reasonable living allowance during the period of estate administration, although such allowance cannot continue beyond one year if the estate does not have the financial ability to pay all estate creditors. Such an allowance can be taken as a lump sum not to exceed $40,000, or in periodic payments not to exceed $3,333 per month (for years prior to 2023, see Adjusted CO Estate Limits). This allowance is addition to anything to which the family would otherwise have been entitled (by will or by intestate succession, as applicable).

A family allowance must normally be claimed within 6 months after the first publication of notice to creditors, or within 1 year after the date of death, whichever comes first. The court can extend this deadline if a request is made before the deadline expires, but any extension can last at most until the 2-year anniversary of the death.

A family allowance has priority over all claims against the estate except reasonable funeral and burial costs, and estate administration expenses. It is also not chargeable against the estate shares of the recipients.

See CRS § 15-11-404 and 405.

Homestead Exemption

Colorado supports the notion of a homestead exemption that protects a certain amount of the homestead from creditors, but this does not create an allowance or award for any surviving family, and distribution of that homestead should be handled through normal processes.

See CRS § 15-11-402.

Surviving Spouse Elective Share

Regardless of what the will says, a surviving spouse is optionally entitled to claim 50% of the "marital portion" of the "augmented estate".

The augmented estate is defined as:

  • The decedent's net probate estate
  • The decedent's non-probate transfers to others
  • The surviving spouse's property and non-probate transfers to others

The marital portion is defined as 10% times the number of full years of marriage, up to 100%. So a surviving spouse that was married for 7.5 years would be entitled to 70% of the augmented estate.

If the spouse will essentially be left with <$67K, the amount of the estate claimed should be increased by a supplemental elective share in order to reach $67K (for years prior to 2023, see Adjusted CO Estate Limits). More precisely, the total is computed by adding the spouse's property (and non-probate transfers to other), the decedent's non-probate transfers to the spouse (e.g., 401K beneficiary), and the portion of decedent's net probate estate (and non-probate transfers to others) payable to the spouse under the primary elective share.

The elective share is primarily a distribution allocation exercise; the elective share has no special protection from creditor claims.

A surviving spouse has 9 months from the death to decide about taking an elective share, or 6 months from probate of the decedent's will, whichever comes later.

See CRS § 15-11-201 through 214.

Specific Bequests

Wills sometimes specify that certain assets or dollar amounts are to be distributed to certain heirs. Such bequests should be generally be handled before dealing with the residuary estate, in which percentages of the remaining estate are allocated to the appropriate heirs. You can mark these bequests via the Distribution dialog (see Manage Distributions).

However, not all bequests can be honored: sometimes the asset is no longer part of the estate; sometimes the bequest conflicts with local law (e.g., community property); sometimes the asset must be sold (as a last resort) in order to pay estate debts.

The process of reducing bequests is called abatement, and any required reductions are typically made proportionately to the recipients. For example, if the estate is worth $50K and there are several bequests that total $100K, all bequests would be reduced by 50%. Similarly, if the will bequeaths three pianos to a particular heir, and there are only two pianos in the estate, then the heir would receive just two pianos. And if there were no pianos in the estate, then that bequest would remain unfulfilled (known as ademption). Even if the estate has plenty of money left over, the executor cannot "make up" for an abatement or ademption; in this example, the executor cannot buy the heir a piano using other estate funds, or just provide extra cash in lieu of the piano.

Heir Percentages of the Estate

Wills usually specify a percentage that each heir should receive of the residuary estate (the residuary estate is the amount remaining after all debts and obligations have been satisfied, and any specific bequests handled). For example, if an estate is worth $200K after resolving all debts, and the will says that Johnny gets $20K (i.e., a bequest), and that Sally gets 40% of the residuary estate, then Sally would get $72K (i.e., 40% of the $180K residuary estate).

If there is no will, then state regulations will dictate the heirs and associated residuary percentages.

Residuary percentages do not need to be realized as single lump sum cash payments, but may be composed of multiple distributions, in various combinations of cash and property.

Tip: You can enter these target percentages on the EstateExec Heirs tab, and as you define distributions, see how you are doing in reaching these targets in the Heir Target Allocation chart on the Overview tab (for additional tips, see EstateExec Reference: Manage Distributions).

Heir Debts

In some cases, a decedent dies with an heir (or multiple heirs) owing the decedent money. As an executor, you do not have legal authority to simply forgive (i.e., cancel) such debts: it would be unfair to the other heirs. The heir to whom the money was lent can either repay the estate the amount owed, or you can distribute the loan as an "asset" to some other heir, or you can deem that such repayment has been made as a portion of the inheritance otherwise owed that heir. For example, if an heir owes the estate $10K, and is entitled to $50K in distributions from the estate, you can distribute that $10K loan "asset" to the heir, and plus $40K in other distributions.

Charitable Donations

A charitable donation is really just an estate distribution to a particular type of heir (a charity). The executor does not have the right to give away items of value to charities unless specifically authorized by the will or the court.

Distribution Completion and Receipts

Actually making distributions to heirs is usually one of the last things the executor does in settling the estate. Although it is best practice to make all the distributions at the end of the process, it is usually permissible to make some distributions earlier if desired (see Early Distributions).

It is good practice to require all heirs to sign a receipt for any distributions (the receipt can cover multiple items). When making final distributions to an heir, it is also good practice to have that person sign a document (perhaps prepared by an attorney), stating that he or she approves of your actions as executor and confirms that he or she has received everything due.

See also EstateExec Reference: Manage Distributions for specifics about using EstateExec to organize, plan, and document distributions that satisfy the directives of the will (and/or the court).

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